Thursday, April 08, 2010

Should China Revalue Its Currency? Becker: NO

"I doubt the wisdom of the US for complaining against China's currency policy and of China for its response. On the whole, I believe most Americans benefit rather than being hurt by China's long-standing policy of keeping the yuan at an artificially low exchange value. The policy makes the goods imported from China, such as clothes, furniture and small electronic devices, much cheaper than they would have been if China revaluated its currency substantially. The main beneficiaries of China's current policy are poor and lower middle class Americans and people in other countries who buy made-in-China goods at remarkably cheap prices in stores such as Wal-Mart that cater to cost-conscious families.

US companies that would like to export more to China have indeed been hurt by China's currency policy. They employ fewer people than their capacity and thus contribute to the high rate of unemployment in the US. But I believe the benefits to American consumers far outweigh any losses in jobs, especially because the US economy continues its recovery.

Since the opposite effects hold for China, I cannot justify the country's policies from the viewpoint of its interests. Its consumers and importers are hurt because the government has kept the cost of foreign goods artificially high for them. Their exporters gain, but as in the US, that gain is likely to be considerably smaller than the negative effects on the well-being of the average Chinese family.

So my conclusion is that the US in its own interest should not urge China to revaluate its currency."Thanks to Dennis Gartman of "The Gartman Letter."

13 Comments:

A refreshingly blunt and honest assessment. If China wants to give us stuff in exchange for pieces of green paper, great. It does hurt American jobs in some businesses. The obvious solution is to switch to another field of employment.

That presumes that they don't affect the subsequent profession and that retraining costs (monetary, chronological, and otherwise) are uniformly zero to those displaced. It also presumes that there is no political interference from China in the form of lobbying groups to send work that way. Neither of those are true.

Unfortunately the facts are that retraining costs are significantly far from zero, and that the PRC politically interferes with the US as well as manipulating its currency via forceful debasement of the Y-RMB.

Thus China will be labeled a currency manipulator and tariffs can be levied against China (and hopefully towards other countries receiving diverted Chinese labor).

The price of shoddy junk that no country can touch in price or quality is the loss of jobs without the replacement of new ones. People will adjust to the higher prices as they have adjusted to lower quality products flooding out the good products.

Should Becker re-evaluate whether he should be a US citizen? Yes given his eagerness to favor the Third World.

It is interesting that market promoting economists seem to want to sabotage efforts to establish a market, such as FOREX, for the Chinese Yuan.

Gary Becker says that U.S. poor and middle income benefit from Chinese currency manipulation. Prof. Becker recently stated "The average period of unemployment for these long -term unemployed is about 7 months. Only a year earlier, in February 2009, the long-term unemployed constituted only 22% of the total number of unemployed persons, and even that percent was up from its share of the unemployed at the beginning of the recession in December 2007."

Mr. Becker went on to state that the educated were much more able to be comfortable during unemployment and with less duration.

Make formal education level determinations a part of what cannot be asked.

The fraction of workers who have been unemployed for at least 6 months tends to rise for a while after a recession, even after the overall unemployment rate starts to fall. This is not surprising since the fact that a person has been unemployed for many months is an indication that he or she cannot easily find a new job. As a result, the long-term unemployed are less likely than other unemployed workers to find jobs quickly after the economy begins to pick up.

To that end, the solution is to prohibit lack of employment(and indirections thereof) from being a factor against hiring someone.

Of course, if you want businesses to use a bad economy to lord over people, then you don't have a problem.

I argue for a market for the Yuan but it is not guaramteed the Yuan will rise drmatically. Prof. Michael Pettis writes from China that the PRC is backing a lot of shaky loans. After a market is established for the Yuan then many gov't practices might be better known. Let the market decide the value the Yuan and its dramatic rise may be tepid.

When China pulls itself out of poverty, they and the entire world will benefit because of mutual trade.

Imagine a world where China is a first world nation, producing first class cars, software, etc, making the world's standard of living higher because of lower cost, higher quality, and innovation.

That's not likely to happen given their government's willingness to kill, imprison, and disappear people for stability. The billions of people are too valuable to them poor and politically penned in than they are free and prosperous.

If it does happen, it will not be in my lifetime. We can survive w/o them more than they can survive w/o us.

>"The price of shoddy junk that no country can touch in price or quality is the loss of jobs without the replacement of new ones."

Sethstorm, your concerns are valid, but keep in mind that it is you and I that make this so. We CHOOSE to buy the lower cost items from China because we then have more money to spend on other things.

>"People will adjust to the higher prices..."

Yes, we will, by buying LESS of everything, including things made in the US.

What of US manufacturers who buy materials or parts from China as inputs to their final product? Their costs will go up also if tariffs are imposed. They will be squeezed between the need to raise prices, and our lower demand for their products. Some may have to lay off workers and some may go out of business, releasing even more workers. What would you say to those workers?

Do you think there will be more or less people out of work compared to those out of work now because of low priced Chinese products?

Please give that some careful thought, as I don't think it's an easy question to answer.